China market blueprint isn't black and white

China’s new capital market guidelines earmark strong reforms but some analysts are not convinced.

The blueprint announced by China’s State Council for financial reforms has injected some vigor to long sluggish stock markets but has not impressed everyone.

China’s A-share market welcomed the news by climbing 2% on Monday, while the Hong Kong market closed 1.8% up on the same day.

The markets have been underperformed for at least two years; last year the Shanghai stock market dropped 6.7%, making it the worst performing stock market of the world’s major economies.

China’s blueprint, issued on Friday, outlines nine main targets for capital market reforms over the next few years. It follows the nine principles issued by the department in 2004, which led to financial reforms to the shareholder structure in blue-chip companies.

On the one hand it is a significant move because it reaffirms Beijing’s determination to push ahead with financial reforms and further open up the capital markets, which should help boost investor confidence.

The guidelines state that the overall goal is to develop a multi-layer, fully functioning capital market system to support growth. 

Several relationships therefore need to be considered and balanced, the guidelines state. These include the relationship between the market and the government, the innovative products and risk control, the risk-taking mentality of investors and the investor-protection mentality of regulators, as well as growth and stability.

The blueprint then gives further targets in seven areas: the equity market, the bond market, futures market, brokerage services, cross-border investment, financial risks and capital market environment.

China’s government pledges to move towards a disclosure-based system rather than the current approval-based one in stock issuance; widen participation in M&A activities and reduce ownership and geographical restrictions on M&A activities; improve the mechanism for local government bond issuance; develop the private equity market in bonds, equities and mutual fund products; and regulators' responsibility will change from administrative approvals to risk monitoring.

These measures will to a great extent help China build a mature and healthy capital market, according to analysts. 

“The endorsement from the top level of government is highly significant. The role of the capital market to transfer savings into long-term investments has become a national economic strategy,” said Qu Hongbin, co-head of Asia economy research and chief economist with HSBC.

However, many analysts expressed concerns about the country’s economy, even though they think the ideas contained in the blueprint sound encouraging.

Citic Securities, China’s largest securities firm by assets, said in a report on Monday that such micro-stimulus can’t reverse the slowdown trend of China’s macro economy and stock markets will continue to be depressed. The brokerage said it needs time to see how the new blueprint is implemented. 

Haitong Securities, meanwhile, said the blueprint would be positive to the market in the long term; they however will have limited impact on the capital market in the near term.

Most of the principles have been mentioned from time to time in various documents and announcements issued by Chinese authorities.

For example, the reform of initial public offerings has been worked on for more than three years, including the almost two-year close of the market, and the regulator has already stated that it will go for a disclosure-based review system.

“I will not be excited unless I can see more details coming out instead of these paper documents and principles,” said a Shenzhen-based banker with a large securities firm.

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